Donor-advised Funds 101
Many of us are familiar with investment accounts - think a 401k or brokerage account - but did you know that there are investment accounts solely dedicated to supporting non-profit/charitable organizations?
What exactly is a donor-advised fund?
A Donor-advised Fund, or DAF, is a tax-advantaged investment account in which money is invested, grown, and then given directly to charitable organizations in the form of a grant or an impact investment. Opening a DAF is one of the most effective ways to support a charitable organization, as non-traditional assets (i.e. assets other than cash) can easily be contributed to the fund for tax-free growth.
Based on data from the National Philanthropic Trust’s 2023 DAF Report, donors in 2023 gave nearly $52 billion in DAF grants to charitable organizations - highlighting the fact that in recent years, DAFs have become an essential component of philanthropic endeavors.
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How does a donor-advised fund work?
Donor-advised funds are actually quite similar to standard investment funds - cash or other assets are contributed to the account, invested, and can potentially grow over time.
However - with a DAF, rather than cashing the account out for the benefit of the account holder (in this case - the donor), the assets in the account are provided directly to qualifying 501c3 non-profit organizations as grants or impact investments. Donors who open a donor-advised fund can choose to support as many or as few charitable organizations as they’d like, as long as the orgs chosen are IRS-qualified, 501c3 non-profits.
To provide a grant or an impact investment to a qualifying non-profit organization, a donor can advise their investment firm on which specific charities they’d like to support. Donors can also determine how frequently or at which intervals these grants may be provided (i.e. in multiple installments, on a recurring basis, or one, up-front grant).
Since cash or assets can be contributed to donor-advised funds at any time, and with no contribution limits, a donor that opens a DAF is also opening up the potential to create a long lasting impact on the organizations they choose to support.
What are the benefits of opening a Donor-advised Fund?
One of the main financial benefits of opening a Donor-advised fund is the fact that once assets or cash are contributed to the fund, those contributions can immediately be claimed as tax-deductible for that years’ taxes - just as a regular charitable donation would be.
Additionally, in a given year, a donor can claim these DAF contributions on their taxes before making any grants to a charitable organization.
Since donors can disperse grants at their discretion, some may choose to wait for their investments to grow before granting them to a charitable organization - maximizing the impact of the fund by providing an even larger grant than what would have been given initially.
Another benefit of opening a DAF is the fact that non-cash assets, like mutual fund shares or cryptocurrencies, can easily be invested into these accounts for tax-free growth. This flexibility allows financial support to extend beyond just cash, which creates a tax-advantaged situation for the donor, and more grant opportunities for the recipient organization.
Furthermore, donor-advised funds have a tax deduction limit of 60% of a donor’s gross income - making DAFs even more attractive to those in higher tax brackets.
Opening a donor-advised fund (DAF) is a simple, effective, and impactful way for donors to support their favorite charitable and non-profit organizations. These investment accounts serve as avenues for continuous giving, and also provide potential tax benefits whenever a contribution is made.
When a donor provides a grant, or series of grants, via a donor-advised fund, they are potentially supporting impactful, mission-critical organizations, like us here at Replate.